Even though I predicted it had to happen at some point because of the Bush-Obama spending binge and America’s giant long-run entitlement crisis, I confess that I’m somewhat surprised that the United States has suffered a debt downgrade for the first time.
That being said, I don’t think the downgrade will matter. Everyone knew the U.S. was heading in the wrong direction before the announcement by Standard & Poor. Moreover, big investors have very few attractive options for where to place their money – thanks to a weak global economy. As such, I suspect the federal government will still be able to borrow money at very low rates.
What does matter, however, is that the American economy is burdened with a bloated public sector that is sapping the nation’s economic vitality. And this problem will get worse every year because of a toxic combination of poorly designed entitlement programs and demographic change.
As the government gets bigger, this hinders growth by diverting resources from the productive sector of the economy. The damage is then compounded by the fact that the two main ways of financing the public sector – taxes and borrowing – both have additional adverse economic consequences.
In other words, the United States has fiscal cancer. Yet rather than try to cure the disease, politicians are – at best – kicking the can down the road. Here is my dour assessment on Bloomberg.
The only glimmer of hope, as I wrote yesterday, is that House Republicans have made serious efforts to restrain the burden of federal spending.
“Poorly designed entitlement programs and demographic change,” perhaps. To me, even more significant is the growing addiction to OPM (other people’s money). An OPM addiction is probably worse than an addiction to recreational pharmaceuticals, and there is no “patch” to help with the cure.
Bush is long gone. This is a BO and Democrat debt problem for which he is primarily responsible. We need to elect those who are willing to make the tough decisions to cut spending and the debt. Stop trying to wrap the GOP into the problem since the voters only gave them control over one house in 2010.
Nicely done. So many folks talk about the deficit as if it was the total debt…
You could be a terrific Treasury Secretary for Bloomberg Administration 2012-2016…
Typical neocon; no mention of the unconstitutional, unnecessary, trillion dollar wars of aggression in the Middle East..
Obama’s been in charge of the two wars for 2 and a half years now, and nothing about either one has changed. Given the Viet Nam model of deciding responsibility, they are both Obama’s wars. And given that GWB got permission from Congress for both, the only “unconstitutional” conflict I can see out there is Libya, which is also Obama’s war.
If the entrenched representatives, both republican and democrat, refuse to acknowledge the fact that their deficit spending has to stop, we have no choice but to vote them out before they destroy us! We can never start to reduce the debt without eliminating the deficits. See http://howardwemple.com/
Paul, Bush was to blame for adding $5 trillion to the national debt by running up record deficits and expanding the welfare state with Medicare part D. Obama is clearly worse and has budget deficits that more than double those under Bush and has added about $4 trillion in less than half the time. Still, Bush and the Republicans in Congress helped get us to where we are today. I don’t blame the Tea Party candidates who refused to support raising the debt ceiling, but I don’t think Republicans who supported Medicare part D, the Wall Street bailout or the Auto bailout should be given a pass. The last decade as been one long spending binge by both sides of the aisle.
Typical response by neoprogs, “What about the wars from the last guy?” without mentioning the current unconstitutional war in Libya, and the continuation of military actions in Yemen, Afganistan and Iraq.
Dems have held the purse strings since Jan 1, 2007; they’ve operated this Gov’t under a Continuing Resolution (CR) since Jan. 2009 to date never passing a budget. Additionally, the Dems have been in total control for 2 years (09-10). Republicans’ have held ONE HALF of ONE Branch of Gov’t for a total of seven months of 2011, and yesterday OBOZO and his admin, were out front blaming Republicans’ and S&P for the downgrade. Pathetic!
To Alex Hoffman- Sir, you have made correct statements and assessments, but for one small thing. You (and I as well) hold responsibility for putting the same old bunch back in when we had the chance in 2008, and again in 2010 to change. How many Demo’s were voted back in despite their KNOWN issues with all things you have already discussed. We the people, by electing these thugs, read that as BOTH parties, have consented to this mess by our continued election of the same thugs time after time. And now Sir, we have at least two generations at voting age who have no idea how government works or care as long as they get what they feel is their dues from the government. I fear the laziness of the voters in not correcting this sooner may very well have put us into this spinning dive to destruction.
Alex,
Thank you for your honest approach. I am a Libertarian who looks at the Republicans and Democrats through the same lens. I get tired of the two parties blaming each other for the very same mistakes that they themselves make. Is Obama care any more of a violation to our rights than the “Patriot Act”? Is bailing out auto companies any worse than QE1 or QE2? Obama has just doubled down on Bush policies, I figure that since Republicans loved the idea of world policing and nation building in Iraq they ought to love and support the war or “conflict” in Libya.
“…Everyone knew the U.S. was heading in the wrong direction before the announcement by Standard & Poor…”
Clearly, the Comrade In Chief nor his Politburo does and they’ll dream up any lie to skirt blame as always.
Apparently, you also haven’t come to terms that their agenda is by design. Their intent is to destroy America as we know it.
“We are five days away from fundamentally transforming the United States of America.” – Comrade Chairman Obama
Re-elect Palin 2016.
The Democrats blame the Republicans. The Republicans blame the Democrats. Different party animals, same results. Those with the ability to see outside those narrow party lines will have to step up and fix the mess they have created. Since the independents now are a larger voting block than either of the two outdated brands, maybe things will get fixed.
they didn’t downgrade the debt as bad as it really is. just like they didn’t do with the CDO’s before the housing market crashed. betcha the banks aren’t betting on us treasuries going up..
Hey, is that a snag on the emperor’s parka that S&P is talking about?
Details, as usual, miss the forest for the trees…
The ratings agencies are issuing a belated and obvious verdict to the citizens of Western world democracies. They are essentially saying that with decreasing competitiveness and 3 billion now increasingly capable competitors in the emerging world, the western voter’s delusional dream of prospering by placing more burdens on productive behavior and making up the difference with centralized economic planning is doomed – thus lenders to the people beware.
But the Western world voter is in a stupor, unaware of the 3 billion Emerging World tsunami facing him. He thinks that he can afford to make irreversible mistakes about his economic future and somehow things will work out, America will stay on top. He thinks that he can renege on the very American principles that made him able to enjoy a standard of living 6 times world average in the first place. He thinks that this is still the 1930’s when America still enjoyed a huge margin of advantage in personal and economic freedom compared to the rest of the world and that somehow they will maintain that advantage. They are unaware that that margin of advantage has become very thin — as others essentially, after having fallen so far behind, mimicked America — and as Americans have gradually eroded the windfall endowment of personal freedom they had the fortune to acquire at their nation’s creation.
Think of the challenge and re-adjustment forced by an emerging Japan in the 80’s. Now multiply that times x20 and you get the picture. If you think the ripple wave of ’80 rising Japan posed a challenge to the US, imagine how the tsunami of 3 billion emerging people is going to be. Genghis Khan is approaching the gates and the Western voter is reacting by declaring war on Steve Jobs.
So how is the citizen voter of the western world going to address the challenge? By placing more burdens on the few who can still produce unmatched products that are competitive on a worldwide scale and making up for the lost productivity through the even more damaging effects of central planning (i.e. the collective management of individual economic behavior) ? By hoping that placing a few more burdens on productive people will make them shift some focus from themselves and their families to their work, so that they can benefit for some distant unknowns? It’s just a delusional tailspin into permanent economic suicide.
But,
Who are these ratings agencies to go against the people? We are the people and we say death to the ratings agencies! If we made Socrates drink hemlock, if we crucified Jesus,… we sure can nationalize 3 ratings agencies. Then they’ll cooperate and come up with good news of “hope”.
Want prosperity 6 times world average without production that nobody else can match? Just vote for it and it happens! Yes we can!
It’s the magic ballot box. Drop your wish and it will be fulfilled. Laws of nature? Ah, details… they can be overturned by the will of the people. Perpetual motion machines of prosperity? Just mark x by Paul Krugman on the ballot and voila! 2+2=9? Just vote for it and it will happen. Yes we can!
Want stellar credit rating by increasing incentives to indolence and a population who cannot produce enough to justify the standard of living it has legislated? Just vote for it and it will happen! Yes we can! Even Paul Krugman says its possible!
Want perpetual motion machines of prosperity, latest consumer products goods and services consuming 6 times the world average without producing goods and services of equal value? Just vote for it and it will happen! Yes we can!
Can we increase competitiveness by forcing the only small minority of people who are capable of outperforming their competitors on a worldwide scale to work for us, some distant unknowns, as opposed to themselves and their families? Yes we can! Just vote for it and it will happen!
Zorba
“I left Greece, but the Greece came to America — and bamboozled voters with the same pixie dust”
Zorba, this is quite good!
[...] It was a strange experience to read the comments and emails generated by yesterday’s post on the “Obama downgrade.” [...]
I enjoy taking the wind out of your sails Republicans and you others that leach on to the Republican banner. The S&P attributes their decision for the credit rating decline to the Republicans in Congress with this statement:
“…the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”
Zorba there seems to be a tear in the sock on the foot in your mouth eh?
I love the comments here. They clearly demonstrate the exact same blame-game that has magnified our fiscal, monetary and economic problems. Who cares if it was Bush, Obama or any other President that created and/or made this situation worse. The driver behind all of these problems is both sides’ yearning for power. Although I strongly believe in the Constitution, I believe an amendment further limiting the # of terms serviced by Senators and Representatives is necessary. The yearning to maintain and/or increase their polticial standing is driving them to make all decisions (incl. foreign policies) with only short-term ‘high’ taken into consideration and long-term costs basically completely ignored. As it is with anything else in capitalism and a free market (to which we’re barely hanging on), incentives are keys to making the right decisions, and if we can somehow alter these politicians’ incentives by limiting their terms, then we might get something done. Just my 2c.
AM: I concur. I have always opposed mandated term limits, but my attitude is changing. Indeed, I think one term of elected federal service should be the max: one term as senator, one term as congressperson, or one term as president. If you run for congress, that’s it–no higher office would be available. That way no-one is spending taxpayer money to get re-elected because there simply is no re-election.
”Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues.” – Standard & Poor
there’s your reason… straight from the horse’s a88′s mouth.
I mostly agree with this article, except for that last assertion that “House Republicans have made serious efforts to restrain the burden of federal spending”. House Republicans made a half-assed effort, it just looked good compared to the quarter-assed efforts of the other side. We need WAY more cutting than either side has any interest in.
‘John Chambers, chairman of S&P’s sovereign ratings committee, told CNN that the US could have averted a downgrade if it had resolved its congressional stalemate earlier.
“The first thing it could have done is raise the debt ceiling in a timely matter so the debate would have been avoided to begin with,” he said.’
http://www.bbc.co.uk/news/world-us-canada-14428930
So according to S&P’s chairman, not having a debate over the budget deficit would have been better than having a debate. Passing Obama’s “clean” debt ceiling would have improved our debt situation? Really?
There’s years of political incest between the Democratic Party and the financial industry (the Fed, the credit rating agencies), so if anything what Chambers is saying is that S&P’s has downgraded our country because it didn’t follow Democratic Party policy.
What I wonder is, did he call Geithner before he did the interview so that he said things the right way?
[...] It was a strange experience to read the comments and emails generated by yesterday’s post on the “Obama downgrade.” [...]
Forget optimism. Survival is key now. Both parties- Republican and Democratic- have clumsily orchestrated this financial Armageddon that my children will have to pay for….unless we immigrate to country with a better future.
Well … looks like the head of S&P announced he will step down at the end of this year. I wonder if was pressured from the top (McGraw-Hill) and if the top was pressured by law makers (both the right & the left), the White House, the Fed and the Dept. of Treasury! And if it couldn’t get any worse … the guy replacing him is the COO of Citigroup’s North America Citibank!!!! Are you kidding me!? Boy, will the post-2011 ratings be a lot more objective or what! The head of one of the top 3 rating agencies, the agency that downgraded the US, will be replaced by an executive from one of the big banks! So now, we literally have the banks running the country and controlling Wall Street. You’ve got Goldman Sachs guys literally at nearly all levels when it comes to monetary and fiscal power positions, now you’ve got a Citigroup executive at the rating house. This is scary!